The Nasdaq Composite index soared 43% in 2023 before rising 29% last year. And through the first month of this year, it was up 2%. Bullish fever has taken over Wall Street.
As a result, some of the world's top companies are trading at elevated valuation multiples. This can be discouraging for some investors, particularly those who prioritize paying an attractive price for the businesses that they want to own in their portfolios.
I fall into this camp. I guess patience is a virtue, as they say. Here's one overvalued stock that I can't wait to buy at a discount.
Stop the video
There are few stocks that have outperformed Netflix (NFLX 9.71%). In the past decade, the streaming video pioneer's shares have skyrocketed almost 1,500%, turning a $10,000 investment into nearly $160,000 today.
Netflix disrupted the global media industry. And for that, the market has rewarded it. But I view the current situation as being way too expensive. As of this writing, the stock trades at a price-to-earnings (P/E) ratio of 50. That's a ridiculously high valuation that you're being asked to pay, even though this is a high-quality business.
The P/E multiple is close to the highest it's been in about three years. I think it leaves investors wanting to buy today with zero margin of safety. Netflix must execute flawlessly, with no room for error, to justify paying 50 times earnings.
NASDAQ: NFLX
Key Data Points
Netflix's excellence
With 302 million subscribers and 2024 revenue of $39 billion, Netflix has unrivaled scale that supports its economic moat. The business is able to spend more cash on content in absolute terms ($18 billion planned in 2025) than anyone else. But it's able to spread this out over a huge user base.
The result is tremendous profitability. The company's operating margin rapidly expanded from 13% in 2019 to 27% last year, with executives projecting to hit 29% this year. This is economies of scale playing out right before our eyes.
Netflix's strong competitive position is further demonstrated by its proven pricing power. Despite consistent price hikes over the past decade, the membership count has marched higher over time. Given that the average Netflix customer spends two hours daily watching the service, there's likely lots of room to raise prices in the future.
Past growth has been phenomenal. But the Netflix show is far from being over. "We still have hundreds of millions of households that aren't members, and we'll grow into that opportunity," CFO Spencer Neumann said on the Q3 2024 earnings call.
Patiently waiting to press play
Anyone who studies Netflix is going to come away impressed. Its scale, pricing power, profitability, and growth potential are all wonderful qualities. The business should at least be on every long-term investor's watch list.
However, I believe the best course of action right now is to wait patiently for the market to present a worthwhile opportunity. Everyone's bar is different. For me, I'll start to aggressively buy shares if the P/E ratio gets to 30 or below.
If this were to happen, the company would probably be dealing with some issues that the market was worried about then. Using history to provide context, Netflix shares tanked in early 2022 when it reported two straight quarters of declining subscribers. And that was around the time management announced plans to crack down on password sharing and introduce an ad-supported subscription tier. Investors were certainly concerned about Netflix's growth prospects.
But the stock has crushed it since then. I don't know when or if it will happen, but there's always the chance that the valuation drops for whatever reason. I'll be waiting for that moment to buy Netflix at a discount.
